09/11/2013

Conflict Minerals: strategic importance to companies

“Conflict Minerals” has been a hotly debated topic for some time, but most recently given the last minute provision was included as Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Final Rule). This legislative provision was profound in nature, representing a legislative avenue through the use of economic levers to attempt to address what many suggest1 is a national security issue. The provision’s mandate to the Securities and Exchange Commission (SEC) to finalize an implementation rule requiring publicly listed companies to implement due diligence measures to determine source and chain of custody of defined minerals used in their products introduced into the stream of commerce represents an emerging movement towards increased transparency in corporate business practices.

From our discussions with companies that began during the SEC’s rulemaking process, to our ongoing efforts in assisting companies with compliance, this is really hard! We see the real challenges companies are facing in developing compliance programs to be prepared for the first filing due in May of 2014, including: availability and quality of information necessary to undertake due diligence, gathering of compliance information, complexities of supply chains, risk assessment, resource availability, and cost-effective implementation.

I’d like to offer a few observations around this topic broadly. As a leading professional services organization, we, at Deloitte2, bring an informed perspective to regulatory compliance and are in the business of assisting our clients in complying with federal securities regulations.

The “wait and see” approach is likely not a recipe for success as it relates to this requirement. One of the marketplace realities serving to disincentivize companies from focusing on this requirement – the legal action brought against the SEC in late October by the Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable around the cost benefit considerations of the Final Rule – was rejected in the U.S. District Court on July 23, 2013. With this development, the “wait and see” approach we’ve seen many companies take to putting in place a conflict minerals compliance program to date is changing rapidly. Although the plaintiffs have until August 22, 2013 to appeal, it may take a few months for the appellate court to conclude; in which case if the appellate court agrees with the U.S. District Court, companies who choose to continue to “wait and see” may lose precious time needed to implement a suitably robust due diligence process. Getting started is key, even with the potential of an appeal and the understanding that additional guidance may be planned from the SEC in the near term.

Global developments continue to emerge around this topic, with governments around the world following the Final Rule’s provisions and marketplace implications very closely. On March 26, 2013, a bill3 was introduced in Canada that would require Canadian companies to exercise due diligence with respect to conflict minerals sourced from the Great Lakes Region of Africa. Under the bill, which is similar to the Final Rule, regulated companies would be required to “exercise due diligence in respect of any extraction, processing, purchasing, trading in or use of designated minerals that it carries out in the course of its activities, or that it contracts to have carried out.” Companies that have, “processed, purchased, traded in, used or extracted a designated mineral, or contracted to do so”, must, within 60 days after the end of that fiscal year, submit to the Minister of Foreign Affairs and publish a report and certain other information on its website. Additionally, a public consultation on a possible European Union (EU) initiative on responsible sourcing of minerals originating from conflict-affected and high-risk areas was issued with a comment period that concluded on June 26, 20134. The aim of this consultation was to get interested parties' views on a potential EU initiative for responsible sourcing of minerals coming from conflict-affected and high-risk areas. The Commission will use the results to help it decide whether – and how in a reasonable and effective manner – to complement and/or continue on-going due diligence initiatives and support for good governance in mineral mining, especially in developing countries affected by conflict. These two developments are specific examples of the emerging global trend which also includes efforts underway or under consideration by Australia, the United Kingdom and other countries. These global developments further emphasize the importance for U.S. publicly listed companies to recognize this growing trend as further reinforcement of the reality of this compliance requirement and the need for a comprehensive approach to compliance.

Compliance program development with an emphasis on governance should be considered a primary focus for companies as they approach this requirement. Given the nature of this requirement, companies recognize the need to engage representatives from multiple areas of the organization. As a part of convening critical leaders, it is important to clearly define responsibilities and obligations of each representative and the governance and oversight mechanisms necessary to effectively communicate the potential brand and reputational exposure of program execution and related disclosures. Each representative brings an important perspective and contribution to the process that will need to be viewed beyond just a ‘check-the-box’ representation as companies work toward a filing with the SEC signed by an executive officer.

What Next: As leading practices around conflict minerals compliance approaches continue to emerge, along with anticipated additional guidance from the SEC, companies will begin to organize around practical implementation measures in the execution of a compliance program. It’s clear that this move toward increased transparency and accountability for companies to take responsibility for risks throughout their operations and supply chain is not likely to slow down anytime soon, so companies should consider taking a comprehensive and reasonable approach.


Kristen Sullivan
Partner

Deloitte & Touche LLP

Sources:
1 The Congo conflict has been an issue raised in the United States Congress for a number of years. For example, in the 109th Congress, then-Senator Sam Brownback, along with Senator Richard J. Durbin and then-Senator Barack Obama, among others, co-sponsored S. 2125, the Democratic Republic of Congo Relief, Security, and Democracy Promotion Act of 2006. See Pub. L. 109-456 (Dec. 22, 2006) (stating that the National Security Strategy of the United States, dated September 17, 2002, concludes that disease, war, and desperate poverty in Africa threatens the United States’ core value of preserving human dignity and threatens the United States’ strategic priority of combating global terror).

2 As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

3 See http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&DocId=6062040&File=4

4 See http://trade.ec.europa.eu/consultations/?consul_id=174

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright ©2013 Deloitte Development LLC. All rights reserved.

Member of Deloitte Touche Tohmatsu Limited

06/26/2013

Economics and "Glow"

The Pinch, Push, and Shift Model for Building Value

We recently blogged about important mindset shifts taking place with regard to environmental, social, and government (ESG) business imperatives.  As members of the Shared Value Initiative and principals at Deloitte LLP, we are positioned to put a spotlight on the persuasive interplay between practicing good corporate citizenship and bolstering the bottom line.  And at the end of the day, isn’t this the very essence of shared value? 

Our experience indicates--that growing numbers of citizens, consumers, employees, and governments expect that companies will partner with other businesses, government entities, and NGOs in a collective effort to protect our environment and deliver positive societal impact.

Indeed, when consumers were asked how important a company’s “social consciousness” was in determining what they buy, 74% of the consumers surveyed said it was either very or somewhat important, according to a NPD and Civic Science March 2013 survey. And as revealed in several recent Deloitte surveys, business leaders are seeing a real connection between upgraded ESG practices and better economic performance. In one late 2012 study Deloitte conducted of 250 senior executives from companies with $500 million+ revenues on a wide range of ESG issues, results showed 64% of those surveyed expect future annual revenue growth to come from products and services that reduce environmental and social impacts. About half anticipate this growth will account for 5% of greater future revenue, while the other half expect between 1 and 5% of future revenue growth will come from environmental and social products and services.1

We may no longer need to look prospectively to see how companies are enhancing shareholder value through better alignment of ESG issues and traditional commercial pursuits.  One
large sports apparel manufacturer, for instance, has recycled 82 million plastic bottles into high-performance sportswear, reducing waste by 19% in its footwear business, increasing the use of environmentally preferred materials by 20%, and achieving a 95% reduction in volatile organic compounds.  To better describe this blend of traditional shareholder value analysis and the emerging science of environmental and social impact measurement, we’ve created a shorthand: pinch, push and shift.

Pinch—Downside risks can be reduced, or “pinched,” as needed in today’s increasingly volatile, resource-constrained, and socially engaged world.  One way to do this is by integrating ESG and financial reporting to increase transparency, improve understanding of risks, and drive targeted migration strategies. It can also enhance what we call “glow”-- the trust and respect earned from customers, investors, and employees for doing the right things right. 

Push—Companies can leverage ESG issues to create new product and service innovations that drive revenue and reduce operating costs—“pushing” shareholder value up.  Our recent research shows that companies that lead in ESG issues are more than 400% more likely to be considered innovation leaders as well.2

Shift—Making ESG factors an integral part of the company’s makeup can improve shareholder value by shifting the expected share price to a higher level, creating a valuation premium.  Pinch and push can contribute to this by strengthening the company’s brand, reducing risk, and fueling innovation.  This shift also comes from achieving greater operating efficiency and reduced waste, lowering costs and increasing profitability. 

We see growing evidence that effective integration of ESG issues into core business activities—risk management approaches, business operations, and strategy formulation—can have a positive impact on a company’s ability to compete now and for the future.  That’s good news for society and for shareholders. 

Stay tuned for more from our end; and we welcome tuning into your point of view as well… 


Cathy Benko
Vice Chairman

Deloitte LLP

Chris Park
Principal

Deloitte Consulting LLP


Sources:
1 250 US executives, ranging from vice president to board member, working in companies with over $500 million in global annual revenues, were survey by Deloitte on sustainability matters in
November-December 2012.

2Deloitte research, “The Sustainability-Innovation Connection—Making It Work,” reported by Daniel Aronson in Deloitte Dbriefs, May 1, 2012. 

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication

Copyright © 2013 Deloitte Development LLC. All rights reserved.

 

06/12/2013

At the Corner of Citizenship and Commerce

A new era for core business interest in environmental, social, and government issues

A hallmark of a new era is challenging longstanding and commonly-held conventions. It’s heartening that the historical perspective of tackling environmental, social, and government (ESG) issues as “nice-to-do-but-not-essential,” has all but evaporated among many cutting-edge organizations.  Businesses today understand that ESG issues can be vital to their success and that new perspectives on ESG issues are driving innovative solutions in key business areas.  A recent Deloitte survey, for example, found that two-thirds of global CFOs expect their role in ESG-related strategies to increase over the next two years.  And, in another survey, the number of S&P 500 companies issuing sustainability reports jumped from 19 percent in 2010 to 53 percent in 2011—and this trend is expected to keep rising.

These findings lead us to conclude that being a “responsible enterprise” is increasingly viewed as a smart business practice.  In short, it’s where citizenship and commerce meet.

Today’s leading enterprises are addressing ESG issues head-on because they see both the tangible and intangible value of integrating actions associated with good citizenship and sustainability into core business activities.  One survey involving 250 senior business executives, revealed three major drivers of their companies’ ESG efforts (the number indicates the percentage of respondents who identified each of these three as either very important or important: 1) 81% - bolster corporate reputation and brand; 2) 78% - mitigate increased regulatory scrutiny; and 3) 80% - meet higher community and public expectations.  Also noteworthy was that the larger the company, the greater the forecast for impact.  And this makes sense when considering that such companies (e.g., $10 billion+ revenue) operate across a broad range of industries and geographies where social and environmental issues are most acute and/or visible.

Clearly, a new era of accelerated interest in ESG has arrived—welcome!--and is stimulating dialogue about how ESG values can both inform the organization’s core mission and strategies and enrich the company’s culture. A LinkedIn poll conducted in late 2012/early 2013 with management and C-suite executives at companies with more than 5,000 employees showed that many responding organizations are transforming their cultures to more strongly reflect ESG values and align them with their core mission and strategies in the following ways:

  • Actively measuring and mitigating ESG-related risks and improving transparency;
  • Using advanced analytics to improve reporting, perceptions, and management of environmental and social risks; and,
  • Aligning their business models with environmental and social goals and their performance management systems with desired outcomes.

Not only have we entered a new era, companies that treat ESG issues merely as compliance or PR levers may be missing a significant opportunity to be rewarded for the good work they do.  And there can be big payoffs in marketplace perception and the benefits that can be traced back to that.  Deloitte’s research, for instance, indicates that leaders on ESG issues are over 400 percent more likely to be considered leaders in innovation.


Cathy Benko
Vice Chairman

Deloitte LLP

Chris Park
Principal

Deloitte Consulting LLP

 

Sources:
Deloitte Dbriefs presentation, “The Responsible Enterprise: At the intersection of commerce and corporate citizenship
DUPress.com, “The Responsible Enterprise: Where citizenship and commerce meet” , http://dupress.com/articles/the-responsible-enterprise/?id=us:el:dc:dup263:read:cons

As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making
any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright © 2013 Deloitte Development LLC. All rights reserved.

03/20/2013

Thinking Outside the Box When it Comes to Packaging

Achieving breakthrough improvements in sustainable packaging is more difficult than simply substituting virgin materials for recycled content. Many companies are seeking to improve product stewardship, achieve waste-reduction goals, and save money by re-thinking the value chain and developing “disruptive” improvements to packaging.  These improvements have the potential to not only reduce waste, energy, and raw materials, but also differentiate from other products and capture a new and growing market of consumers who prefer more “responsible” products.

Collaboration and creativity required

There is a range of packaging improvements that can be considered, from passive materials replacement to more radical supply chain redesign, as shown in Figure 1. Conducting a current state packaging analysis can help surface which improvement opportunities make the most sense.  A good place to start is with a Life Cycle Assessment (LCA) — a quantitative assessment of the environmental impact of packaging which illustrates environmental “hot spots” and improvement opportunities.  These studies can also be used to conduct scenario analyses to understand how a switch in materials or processes may alter costs and environmental impact.

Pic

More radical improvements require greater effort, but they have the potential for greater environmental and financial benefits. These disruptive improvements require a healthy dose of creativity and coordination across multiple groups including product development, manufacturing, merchandising, procurement, marketing and even suppliers — challenging each other to break free from traditional notions of packaging.

An example is Method’s creation of an “8x” concentrated laundry detergent. The product reduced overall packaging volumes by 36% compared to its 2x concentrated product, and reduced the average lifecycle carbon footprint by 35%. [1] Changes that affect the size, weight, or shape of a product should be coordinated with logistics & distribution and merchandisers, since they will affect how a product is shipped, stored, and displayed.

Realization of packaging changes often requires active collaboration and innovation with suppliers.  However, collaborating with suppliers can be tricky, and it’s helpful to learn from others who have been down this path. Click here to learn more.

A biopharmaceutical company found a way to substantially reduce packaging and fuel from transporting temperature-sensitive medicines. Working closely with hospitals and specialized carriers, the company switched from using cold packs and insulated boxes to a system of refrigerated trucks. The increased cost of using refrigerated transport was more than offset by the decrease in packaging material and weight transported. A pilot project carried out in just one city resulted in savings of roughly 100 tons of packaging per year, as well as reductions in fuel consumption. The change also made life easier on its customers, the hospitals and pharmacies, who no longer had to break down boxes and throw away dumpsters' worth of cardboard and insulation.

Potential rewards await those who think innovatively about packaging. Although most sustainable packaging solutions have focused on altering current packaging processes to accommodate more environmentally friendly materials, those who develop more transformative approaches to packaging could stand to gain even more. The process starts with a whole-scale assessment of the value chain and rethinking the role of packaging from the customer's perspective. Companies who take this step may be able to capture cost savings, increase brand awareness, and grow market share.

Interested in learning more?  Download the paper here.


David Linich
Principal
Deloitte Consulting LLP


[1] Method Laundry Detergent, http://methodlaundry.com/

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright © 2013 Deloitte Development LLC. All rights reserved.

02/20/2013

Market Data Suggests Sustainability Efforts

Help Drive Important Finance Transformation

Deloitte’s study last fall of CFOs strongly indicated that top finance officers see increased linkage between ROI and sustainability initiatives within their organizations—and across their supply chains.   The 250 CFOs surveyed (representing companies with an average of $12 billion in revenue, across 15 industries in 14 countries) further suggested that their involvement with sustainability efforts is deepening—two-thirds say they are “always” or “frequently” involved in driving execution of sustainability programs in their organizations.

In fact, Deloitte believes that ripples created by the growing need for sustainability metrics are now driving a tidal wave of opportunities for today’s finance functions.

For example, there clearly is a growing demand among investors and financial analysts for business-relevant, non-financial data that will assist the financial community in making more informed decisions about fundamental organizational value.  This includes increased emphasis among stakeholders for integrating material environmental and social factors into the company’s business strategy, how management of these issues will benefit the business in terms of competitiveness, and how risks within operations and the supply chain are being actively managed.

Finance has a critical, broadening, and evolving role to play in business performance, and, as sustainability emerges as a core business issue, that role will increasingly focus on resource management, sustainability risk analysis, and new market opportunities.

It is not an unfair statement to say that when looking back a few years from now, CFOs and other C-suite decision makers may say they owe a debt of gratitude to sustainability initiatives for helping transform how business value is captured, analyzed, and reported.


David Pearson
Chief Sustainability Officer and Global Managing Director, Sustainability
Deloitte Touche Tohmatsu Limited



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